In the year 2001, four corporations issued 120 million Kuwaiti Dinars ($390 million) in bonds through the National Bank of Kuwait (NBK), making it the most active year for corporate bond issues in Kuwait ever, confirmed an NBK report. One of the bonds was issued late in the first half of 2001, with the rest offered during the second half of the year.

Lower interest rates, regulatory changes and an increased appetite for corporate bonds as investment vehicles contributed to the recent rise in bond issuance. At the start of 2001 there were KD 185 million in outstanding corporate bonds. By the end of the year this number had risen by 16 percent to KD 215 million. Though 2000 saw no bond issues, the three prior years were quite active, with KD 75 million in bonds issued in each of 1998 and 1999, and KD 35 million issued in 1997.

Two of the bonds issued in 2001 helped rollover maturing or retired debt. The National Industries Group issued a five-year KD 35 million bond in November to replace its three-year maturing bond. The Kuwait Projects Company (KIPCO) also issued a bond in November and opted to retire one of its two outstanding bonds in December.

The NBK report indicates that a series of interest rate cuts by the Central Bank of Kuwait (CBK) during 2001 was an important factor behind the surge in bond issuance during the year. The CBK reduced the discount rate from 7.25 percent at the start of the year to 4.25 percent following the most recent cut in October, a 300 basis point drop. This made it more attractive for issuers and increased the appetite for investors looking for a low-risk fixed-income investment paying more than bank deposits.

Though still small in comparison to bank credit and equity markets, the bond market appears poised to grow in importance as a source of long-term financing for Kuwaiti corporations. Still, its development will remain constrained by the lack of a secondary market that would enable investors to liquidate their holding if in need for liquidity.

Corporate bonds in Kuwait tend to be medium-term with tenors ranging from three to five years. All four bonds issued in 2001 have a five-year tenor. While the bonds have tended to carry a fixed annual or semi-annual coupon, the issue by KIPCO in 2001 had a variable annual coupon payment priced 125 basis points above the CBK discount rate.

A secondary corporate bond market is virtually non-existent in Kuwait. Despite a number of debt issues being formally listed on the KSE, secondary trading is rare. Most investors buy the bonds at the time of issue and hold them to maturity. Investors are largely made up of Kuwaiti corporations and high-net-worth individuals who see these securities as a rare opportunity to diversify their portfolio and secure a higher return than bank deposits with relatively low risk. One of the factors hampering the development of a secondary market aside from the rarity of bond issues, is the absence of a formal secondary market for risk-free government bonds against which the market can benchmark corporate bond yield.

New CBK regulation in 2000 has made it more attractive for bank issuers to finance their assets through corporate bonds. The change allows banks to increase their consumer lending capacity by 30 percent of the value of corporate bonds. In contrast, banks can extend consumer loans only up to 12 percent of the value of their customer deposits. For banks seeking to grow their consumer loans portfolio, issuing corporate bonds is attractive.

There are a number of bond issues in the pipeline at present, which could see the light sometime in 2002. The Commercial Facilities Company is working on a KD 18 million bond offering and the privately held Financing Services Company recently announced intentions to issue a KD 15 million bond.

On February 19, National Bank of Kuwait offered a variable rate three-year Eurobond raising $450 million. This is the first bond issue by a Kuwaiti corporation in the international market. The security has been listed on the Luxembourg exchange and carries a variable rate tied to the three month London Interbank Offer Rate (LIBOR). — (menareport.com)